December 2, 2008

The cause of our economic woes

I think Andrew Bacevich may be more right than anyone, in blaming all of us for wanting to live beyond our collective means, but I also think that a big part of our problem is the faith that says markets are all knowing. Don't get me wrong. I think markets can be wise in certain ways. But self-interest and greed are not always the best ways to make decisions, and we all know that in our own personal lives. Why we think that should govern an economy is beyond me. Grover Norquist (famous for wanting government small enough to drown in a bathtub) now blames the crisis on the 2006 election, and says the economy melted down because the market senses upcoming tax hikes. The man is a moron, so we should not take him seriously even though he is a prominent advisor to the Republican leadership.

But this hands-off approach to the economy was not a good thing, and I don't know why people argue that. You can arguably squelch an economy with too much regulation and taxation, I will concede, but you can also create economic chaos by not bothering to keep an eye on those with economic power. Yesterday, we learned (to no one's shock here at the blog) that Bush was warned about this, but chose to listen to the wolves rather than guard the henhouse:
"The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents."
As we have said many times. Our choices are not between socialism and a free market. Our choice is to engage in our economy and keep an informed eye it. That means that just as businesspeople don't just assume their workers will do a good job, we don't assume that corporate and business leaders have the same interest as the consumer or the worker. History has taught us that.


LB said...

I think you can make a case that the economy was hurt by bad regulation as much as it was hurt by lack of regulation.

The Community Reinvestment Act of 1977 had a significant influence on forcing banks to grant loans to people they used to not grant loans to.

That said, the ultimate cause I would agree is too many Americans living beyond their means.

The question is, who/what is responsible for Americans thinking they could live in debt?

David Brooks had a very good column about this

The interseting thing is that it seems both liberals and conservatives can agree, regardless of the role of government, or leack thereof, in the economic crisis, that if Americans had a little more self-restraint none of this probably happens.

I wish and the rest of the Church, liberal and conservative would move toward teaching some of this restraint against American consumerism.

Streak said...

I disagree with your first premise about the economy being hurt as much by bad regulation. Especially in the last 12 years with Republican management, we have had a continual mantra of less regulation. The CRA is still incredibly misunderstood, in my estimation. Not that it was all good, I agree with that. But it hardly caused this economic collapse.

I agree on the last part about consumption and greed, but would add that for those of us who have raised that in the past, we have often been accused of socialist leanings or the like. Criticizing American capitalism has been unacceptable. said...

LB: Interesting points. Of course, all sorts of people live beyond their means, and not just those who really, truly shouldn't have taken out bad loans. A loan of any sort, by definition, is living beyond one's means. And wouldn't that apply to almost all Americans? One can be relatively affluent and upper middle class, but if you have a car or house payment you are living beyond your means. And this applies to me, too, of course. With wages and salaries like they are, the only way to get to a situation that you are talking of, one without debt, would be to scale back expectations so radically that I don't think we Americans could take it. And again, this applies to myself: guilty as charged.

LB said...


I see your point. So perhaps I should nuance what I mean about living beyond one's means.

Growing up, I was taught the first thing you had to do to get a loan was to prove to the bank you didn't need one.

At some point, and I'm not sure when exactly, America reached a point where loans were something everyone believed they were entitled to. (And I'm not sure how we got to that point either).

So the American society in the last 10-20 years has eased itself into an era of easy credit. This easy credit extended beyond home and car loans to credit cards where everyone was suddenly prequalified for a 0% financing for the first six months. (I exagerrate, but you get the point).

The mentality in our country shifted from "I won't but it until I have cash to pay for it (except for a house, and maybe a car)" to "Cool, np payments for the next two months and then I only have to pay $45 a month for this sofa for the next 26 months!?! Let me have it!"

Allow me to rephrase with a less flippant example. Under the old rules that I described above, its hard to criticize people for getting loans on cars and houses. In our society, cars are pretty close to a necessity because of how spread out things in America are and how poor mass transit is throughout most of the country. A house, again under the old rules, could legitimately be thought of as an investment because you could reasonably expect to sell it for an amount that would cover your loan because the market wasn't flooded with too many sub-prime loaned houses.

Today Americans take out loans (we just call these loans credit cards) for everything. Americans who really can never expect to actually pay off a mortgage are given one. Everyone has a credit card, but not everyone can pay them off at the end of each month. Thus, we are taking out loans for flat screen TVs, couches, Wiis, etc.

The difference is that in the past people were taking out loans on legitimate needs and those alone (and one of those things could often be sold for a profit).

So sorry for a very long comment where I probably repeated myself alot. My point in brief is we used to live in a world where we only got things on credit that we really needed. Now we get things on credit for our needs and most of our wants and we get that credit without the same kind of collacteral we used to need. That is what I mean by living beyond our means.

Streak said...

The historical scholarship suggests this transition from pay as you go to credit based occurred a long time ago. It is always interesting, actually, to read accounts from the 1920s (as I know Anglican has) and to hear the very same nostalgic complaints--people are living beyond their means, and are less moral, kids are too sexual and disrespectful, and of course, their music is too loud and obnoxious. All of those things were common complaints in the 20s. In fact, those same complaints can be moved back several generations. Over that last 120 years, or so, we certainly have seen the expansion of credit, and credit based purchasing, but it in no way just happened now.

The focus here seems to be the weakness of the individual consumers to pay for what they purchase, rather than delaying the payments for as long as possible. And that is clearly an issue, and you can add me to that list as well. But what is not discussed here is the profit motive on the other side. Same, I would add to the sub-prime mess. While conservatives like to blame the poor people getting loans under the CRA, we seem to forget the huge profits made by mortgage brokers throughout the country--profits, I would add, that were so large I find it inconceivable that the main root was loans to poor people. (In fact, I know that subprime loans were made to a lot of people who were by no means poor.)

The same point can be made about credit cards. Who made those cards available to anyone with a pulse, and why? Why have Universities become complicit in pushing credit cards on young kids?

The profit motive and greed behind much of this is often not examined when we look at the moral weakness of the American consumer. said...

LB: An excellent elucidation of your point. I agree with you, though I would trace the reliance on credit farther back, probably to the era prior to the Great Depression, when revolving payment plans first appeared en masse to support a host of new consumer goods--and, not coincidentally, the Model T. And of course the massive buying of stocks on margin--credit--that collapsed in the crash. It is true that the credit card industry has become especially predatory in recent years--and again, guilty as charged--but that wasn't unprecedented.

LB said...

Steak and Anglican,

Thanks for the points about the shift in the financial system going back further than I realized.


You are right to say that businesses have engaged in predatory practices. That is why I pointed out the David Brooks column in my first comment.

Both the consumer and businesses have together "worked" to create a culture in which easy credit it acceptable and there is no shame in it. As such, society has slid into a situtation where buy now pay later has become a dangerous norm.

While I see this as morally wrong, it is not my opinion that it is the government's job to end this. I feel that it is the job of the Church to have a prophetic voice and encourage people to be counter-cultural (as Jesus so often was) and reject the idea of buy now, pay later.

This is a theological/philosophical difference and I realize we will never agree on the government's role in the economy. But I hope we can agree that the American church (liberal, evangelical, conservative, etc.)has had a moral failing in not stressing "living within one's means."

Streak said...

On the issue of easy credit, making credit available (and even into poor hands) is not necessarily a bad thing. The CRA, for example, outlawed the practice of "red-lining" or denying loans to people who lived in certain areas regardless of their work ethic, or what have you. What we are talking about, at least partially, is a practice of encouraging unhealthy credit usage because of its huge profits.

And that is where we probably disagree. I do see a role for the church to challenge greed and affluence and consumerism. In the past, conservative churches have criticized materialism, but not greedy business practices. Liberal churches, I think, have done the opposite.

I guess I am unconvinced that the conservative church will really address capitalism, or actually thinks there is anything wrong with that profit motive. Nor, I guess, am I convinced that their moral outrage (if they have one) will stop businesses from preying on the American consumer. And if not, then only government can play referee in this mess.

leighton said...

From the perspective of political organizing, it seems more helpful to talk about churches rather than "The Church." Besides the obvious fact that churches are diverse and have different methods and priorities in their outreach, the notion of "The Church" is a theoretical construct that may help motivate like-minded people to action, but tends to distract people who don't have a vested interest in preserving one particular faith tradition. Saying in effect "Get involved with a church or don't bother trying to help" and turning away those who might otherwise be allies seems unhelpful for people whose priority is addressing social issues (as opposed to, say, establishing a veneer of unity across several Christian denominations).